Against Bailouts

I was always against the mortgage bailout as a theoretical matter, but about the time it passed I decided I was against it as a practical matter as well. My biggest problem with it was that it passed almost unlimited power to the Treasury to meddle with the markets. This lack of transparency means that nobody wants to sell their damaged assets at market price because if they hold out they might convince the government to pay more for them.

One argument I didn't make, but maybe should have, was that it's a slippery slope from one bailout to another. I certainly foresaw at the time a disastrous bailout of individual mortgage holders who bought houses they couldn't afford on terms that any reasonable person could have seen would get them into trouble. I've outlined the problem with this sort of thing before, but to summarize it comes down to the fact that some people bought things they can't afford and now everybody else has to pay for it. This means that if Alice, Bob, and Charlie all make $60k and have similar lifestyles that if Alice bought a $250k house, Bob bought a $150k, and Charlie decided to hold on and wait for the market to drop, now all of them have to pay $200 a year in takes to fund Alice's house and to make matters worse the market stays high so Charlie doesn't get the deal he was holding out for (because he's now paying Alice to stay in the house he was hoping to get when the price dropped).

But I certainly didn't foresee that this would end up in bailouts for Unions, Auto makers, and state governments. I've only seen a couple mentions of state governments, but that's the real focus of this post because I can't imagine something more anathema to the original layout of our government than the bailout of a failing state. It might seem like I'm engaging in a great deal of hyperbole here, but I'm really not. Most people would probably point to Free Speech or Free Religion as the bedrock of the US Constitution, but the fact of the matter is that though it might be the first of the amendments, it's an amendment, not part of the original document. The thread that primarily holds the Constitutional together is the idea that a Federal government only has certain delegated powers and for the most part the States can operate independently. There are several reasons this is a good idea, but two of the primary ones are that it keeps administration of day to day activities closer to the people actually affected and that it creates an incentive to move toward better ways of organizing your government. If the New York law regarding health care is doing a fantastic job and people are going to New York doctors to get services, pretty soon New Jersey (and the rest of the country) will realize what a great thing they have and adopt it.

By bailing out bankrupt state governments we're doing the exact opposite. If North Dakota decides they don't like pollution so they're going to outlaw cars and build monorails for everything and this causes a huge dip in tax revenues as businesses move away and a huge increase in spending, don't worry. The taxpayers from the other 49 states will come to the rescue and subsidize the monorail so that the one state with the bad idea can keep behaving how they want.

Besides this being appalling on its face, it's also interesting with how it fits with a particular pronouncement from President Elect Obama. He was quoted once on the stump with saying that "We can't drive our SUVs, eat as much as we want, and keep our houses at 72 degrees at all times and then just expect that other countries are going to say OK." To be frank, as long as we're paying to keep the Oceans safe from piracy, funding 22% of the UN (at a rate of $1.42 per citizen), and not taking a dime from other countries, I don't care if they think it's OK. Though I don't know his stand on it, I would guess that since he normally takes the standard progressive line that he thinks bailing out California or New York for spending well beyond their actual income is fine. It's a rather odd position to think that people in Nebraska should be okay with paying for unaccountable government spending on Californians, but we need to worry about what France thinks of us spending money we earned how we want.

McCain/Palin

I've seen several comments to the effect that McCain did the best a Republican could have done in this election cycle. I couldn't disagree more. I wholeheartedly agree that McCain did a fantastic job campaigning. Much better than I expected. He probably couldn't have done any better, but that's not the same as saying that somebody else couldn't have.

They day before Super Tuesday I vehemently opposed McCain primarily because I stated that he couldn't win the Presidency. He was great on Iraq, but horrible on everything else. And he was, in fact, so great on Iraq that after his policies were implemented in midyear Iraq became such a non-issue he had nothing to run on. My question on Super Monday was "Do we really want to stake the campaign on early support for the surge against optimism, youth, media support, and the promise of amorphous change?". It ends up I think the Republican primary voter answer was "yes, we do" (though from what I've read several of those voters ended up changing it to "yes, we can" by the time the general was finished).

I'm going to differ from conventional wisdom in that I think Palin was a great addition to the campaign. She was as much a Washington Outsider as you could get in a year when something new was extremely important. Her political inexperience and the fact that she had more executive experience than everyone else running combined should have highlighted Obama's inexperience. She drew huge crowds everywhere she went, frequently bigger than either candidate at the top of the ticket. If anything, the main problem with Palin was that she was being handled by McCain. The wardrobe fiasco, for instance, would never have happened if she had worn her normal red suits.

Obviously Obama benefited from the fact that he broke his promise to use public funds, that the major media were essentially operating as campaign adjuncts, and that he got huge numbers of donation (including huge amounts of credit card fraud and illegal donations which he intentionally didn't check into), but that doesn't let McCain off the hook.

Everybody knew going in that Obama would have the support of the media. They were practically running his primary campaign with their continual assertions that the rather close Democrat race was over and their former darling Hillary should concede. Either Romney or Giuliani would have handled that better, since they've both had to go against the media before. Most of the time when McCain comes out on a controversial issue, it's with the media and against the Republican base. He's really never had to pick a fight with the media before.

Additionally Obama raised a huge amount of money by breaking his promise to use public money. McCain would never have broken his promise, but Romney wouldn't have had to. I'll go ahead and admit that in 2000 I liked McCain's campaign finance reform idea. I've since come to my senses and realized it's both an Unconstitutional intrusion on the ability of private citizens to let their voice be heard about the election and an ineffectual way to limit campaigns, serving mainly to help incumbents and those supported by the media. As far as I know, neither Romney nor Giuliani ever supported it, so they could have entered fund raising on the same ground as Obama (and then Obama wouldn't have had to lie to the American people, since he said he would take public funds only if his opponent did).

Most importantly of all, as I pointed out nine months ago, McCain only had one solid position: Iraq. McCain is for the Constitution, but okay with suppressing political speech through campaign finance laws. He is all for limiting the wasteful purchase of $3000 projectors for some random local project, but also for spending $700 billion on an ill defined plan to buy up bad debt from corporations. He is for national security, but against a border fence. He's for strict constructionist judges, but not as strict constructionist as Alito. Like Obama, McCain is to a large extent a populist (as, unfortunately, Sarah Palin appears to be as well). He decides things not from a consistent world but from what seems to him right at the time.

There was a lot I didn't like about Romney and especially Giuliani, but they had a coherent platform and would have been comfortable fighting on any issue. I didn't hear Romney's speech at the convention, but I've heard him before and he could have annihilated Obama in the debates on healthcare, taxes, spending, and executive experience. Both Thompson and Giuliani gave far better convention speeches than any of the stump speeches (including the convention) I heard of McCain's the entire cycle. Additionally a Mayor or Governor paired with Sarah Palin would have been in a perfect position to truly eviscerate a couple of establishment Senators with no executive experience whatsoever.

This is not to say I think they could have won. Barack held all the cards in this election cycle and his Presidency was all but inevitable. I do, however, think that someone else could have done better.

Obama is my President

I read a couple of comments on political blogs last night saying that Obama stole the election and "he's not my President." I've heard enough of that garbage the last 8 years; conservatives need to get over it.

I don't like Obama. To be frank I think he is going to do more damage to this country than any President since FDR. I think in the campaign he has shown himself to be extremely hostile in suppressing opposition speech, willing to intentionally turn off fraud checking on his credit card donations to abet credit card and campaign fraud in furtherance of his election, and willing to lie about his positions (I'm not sure what else to call it when he is simultaneously espousing conflicting positions, unless he's just postmodern enough to reject truth itself). But I think Americans knew what they were voting for, and they chose him.

Do I wish McCain had won? Sure, I also wish Fred Thompson or Romney had won, but that didn't happen. Do I wish voters were better informed. Absolutely. Do I wish we did a better job cutting down on voter fraud? Yes.

Was Obama elected President of the United States? Yes.

I can reject the whole idea of elected leadership, but I cannot reasonably accept America and reject Obama.

CNN finally reports on what Community Organizers do

I'm shocked, shocked that the Association of Community Organizers for Reform Now is turning in fraudulent votes. Nothing like this has ever happened before. Except every previous election going back at least 12 years.

I especially like how CNN states that whomever loses the county has legitimate grounds to complain about fraud. I'm sure the organization Obama used to work for and channeled grant money to with Bill Ayers, and which endorsed Obama in 2004 is going out of their way to register McCain voters. Sure.

Four more years

Obama's campaign (quite reasonably, since it takes the spotlight off of Obama) seems to believe the answer to every question is that McCain is associated with Bush and so if you're unhappy with where we are now then you're going to get more of the same from McCain.

Since Obama thinks associations mean so much, is it fair to assert that under Obama we can expect four years of Pelosi, Reed, Rezko, Ayers, Dohrn, Wright, Daley, ACORN...

The Credit Crisis: (part 3)

I heard on the radio show this morning a political commentator thanking those Senators who voted against the new bailout bill for voting how their constituents have asked them to. It might well be true that they should have voted against it, but they shouldn't do it because that's how their constituents asked them to vote. We have a representative democracy precisely because the public is often ill informed and has a strong tendency to act in a manner contrary to the long term health of the country. The job of a legislator, and in particular a Senator (which is why they have 6 year terms and are supposed to be put in my the State government instead of direct election) is to temper that tendency by voting, after careful study of the issues, in the manner they think best serves the country.

But I'm not intending to talk about the Senate today; today I want to talk about the House. I'll start by saying that the bill that was voted down in the House on Monday was terrible. There are a million better proposals out there that would probably be cheaper and more predictable. But none of them are going to get through a Democratically controlled congress. The Republicans lost the congress in 2006 and it does no good to whine about how we can't get the perfect Conservative bill through (not that they could in 2004, either). We're going to get a bill, and now that we haven't passed the only chance we're likely to get at a clean one, it's going to be something porked up to get more votes from Democrats.

Having said that, Nancy Pelosi doesn't get to whine that Republicans didn't support this bill and that's why the market dropped. It wasn't their bill. I'm sure if you had the Republican Study Committee get together and write a bill they could get something that 90% of Republicans could vote for (though the President probably wouldn't like it). If they held the majority in the House, they could get it passed. But they don't. Democrats have the majority, Democrats get to write the bills, Democrats get to pass the bills, and if the bill doesn't pass because 95 Democrats didn't vote for it, that's their fault.

The Credit Crisis: How we got here

There have been a lot of reasons bandied around for the current credit problem. There were a lot of causes of this, so many of them are right, but some more than others.

The preferred Democrat reason seems to be corporate greed. Certainly there is an element of that, but greed is always with us. You can't rationally claim that this whole thing was caused because the heads of some corporation are greedy and if we replaced them it would all get better. There are essentially two ways to run an economy. You can give power to the government or to business. At least with business you have to choose to give over your money. There were certainly instances out there of banks doing things like lying about the terms of a loan or preparing duplicate contracts so the buyer didn't sign what they read, but these instances were already illegal and I would imagine that they're fairly uncommon (though more common than they should be). The overwhelming majority of problem mortgages aren't people who were cheated, they are people who took a subprime ARM on a house where they could barely pay the artificially low teaser rate. It might be scummy that banks did this but it's not a surprise that a adjustable rate offered with a half point discount from the lowest rates in history is going to go up. The information that this was a bad deal has been around for ever and, as I'll show later, the government not only didn't discourage this, they actively encouraged it.

Barack also submitted the Gramm-Leach-Billey act, which he falsely claims McCain voted for (his running mate, by the way, actually did vote for it). That bill removed a restriction that "savings" banks couldn't also do "investment". The obvious problem with this in the current climate is that when Wachovia's investment side takes a hit, their savings side is also put at risk. I haven't delved very deeply into how much FDIC is impacted by the potential change in Debt-to-Equity (hereafter DE) ratios that this poses, but so far my savings at Wachovia is fine even though their investment side had problems and none of the major federal bailouts were operating as banks, so this can't possibly be the main culprit.

There are two actions by the Fed that have come up as issues. By far the most common is the assertion that Greenspan and later Bernanke lowered interest rates too much to avoid corrections. Certainly this seems valid. The dollar is very obviously weak even relative to other currencies that are themselves inflating. And when dollars are cheap the natural thing to do is to spend as many of them as you can, encouraging all sorts of speculation. In particular in this case it encourages people to buy houses they can't afford because the cost of the house and the interest rate (on an ARM) both look better than they are.

The other Fed action, which I was unaware of until this morning is something Bernanke implemented called the "Term Auction Facility". This was put in place at the beginning of the problems with credit. I don't know much about it, but at least one economist states that among other things it hides who is borrowing money from the Fed from other banks, which makes banks skittish about interbank loans. As I said, I haven't looked very far into this, but it's potentially a really huge deal. Anything that hides loans to banks is going to necessarily mean you can't tell how much the bank is worth. If you don't know how much banks are worth that's going to screw up interbank loans, and interbank loans are where a lot of credit comes from in our system.

The final potential problem I've seen is the Community Reinvestment Act of 1977. This is a bill that went after mortgage banks because they were only offering loans to relatively well off people. The bill requires brokers to make loans across the income spectrum and carries stiff penalties if they "redline", or only offer them to people who are well off. It was updated in 1995 to allow Fannie Mae and Freddie Mac to buy subprime loans, to allow subprime loans to be repackaged as securities. It was then weakened in 2004. There are those who argue, reasonably, that this did not contribute to the current debacle because 75% of subprime loans are made by banks not covered by the CRA and because subprime loans escalated after the bill was weakened. I'll admit this probably wasn't the prime mover, but a huge percentage of those loans were still almost certainly underwritten by Fannie or Freddie, which are quasi-government agencies authorized, by the CRA, to buy the loans. So yes, the loans were made by non-CRA banks who thought they could rake in the dough (and probably did) by using funds from a government sponsored entity and selling the bad loans off as equity for a profit later. But that GSE gave them money because of the CRA.

The last contributor is the existence and mismanagement of Fannie Mae and Freddie Mac. Fannie and Freddie are quasi-private companies that make a profit for their shareholders but are theoretically overseen by congress and had an implicit guarantee that the taxpayers would bail them out if they got in trouble. It was frequently argued that the taxpayers would not bail them out, because otherwise there would be a strong incentive to take huge risks since the potential profit from them is high and the loss would be insured by the taxpayer, but as we have seen in the last 2 weeks, we're going to pay the loss. We have known for at least 5 years that both of these government sponsored entities were behaving in ways that are clearly irresponsible and would be illegal for a private corporation. Their DE ratio was 65:1 (banks maintain 10:1), they frequently took actions that would have violated Sarbanes-Oxley if they weren't the government, and their management was known to manipulate accounting data to maximize bonuses. I know this because it was all brought up in hearings in 2003 and 2004. As you can find all over YouTube several congressman, most notably Barney Frank and Chris Dodd, thought this was much ado about nothing and fought hard to let Fannie and Freddie continue doing the great work they were doing securing bad loans for people at great risk to the taxpayer. After all, as Franklin Raines, Fannie CEO and Obama advisor, said "These assets are so riskless that the capital for holding them should be under 2%". The Republicans may not be free from fault for this, though. Though opposition to increasing oversight of Fannie and Freddie were Democrat concerns, the Republicans controlled the Congress in 2004. I haven't been able to find the bill number or roll call on the call to regulate them more heavily, but if it didn't pass the House it's the Republicans fault. They could have done it with no Democrat help so Democrat stupidity should not have prevented it from passing. (The Senate, of course, is another matter)